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GLOBAL LOGISTICS
LECTURE 2: FINANCIAL IMPACT OF
INVENTORY

Agenda
1

Definition of Inventory
2 Types of Inventory
3 Positive financial impacts of
Inventory
4 Negative financial impacts of
Inventory
5 Inventory and Cash flow
6 Summary

1 Definition of Inventory
Inventory

can be defined as the amount
of material which a company has in
stock at a specific time.

In

term of finance, Inventory can be
defined as the total capital investment
over all the materials stocked in the
company at any specific time.

2 Type of Inventory
Inventory can be in form of:
raw

material inventory
in process inventory
finished goods inventory
spare parts inventory
tools and equipments
office stationary etc.

3 Positive financial impacts of
inventory
Inventory

has many positive impacts in
term of cost saving, sales support and
effective operation:
Material available to meet future
demand
To avoid Bullwhip effect:

◦ demand information is distorted as it moves
away from the end-use customer
◦ higher safety stock inventories to are stored to
compensate
Inventory provide an independence

from vendors

3 Positive financial impacts of
inventory
Keep

supply chain moves smoothly
Take advantage of discount as buying
large amount of material
To reduce machine idle times by
providing enough in-process
inventories at appropriate locations
To reduce clerical cost associated
with order preparation, order
procurement

3 Positive financial impacts of
inventory
To

reduce the material handling cost
of semi-finished products by moving
them in large quantities between
operations.
Stability of Input cost
Take advantage of discount as buying
large amount of material.
Take advantage of economy of scale
in transportation

4 Negative financial impact of
inventory

Inventory cost in a business include:
Unit

cost: it is usually the purchase
price of the item under consideration. If
unit cost is related with the purchase
quantity, it is called as discount price.

Procurement

costs: This includes the
cost of order preparation, tender
placement, cost of postages, telephone
costs, receiving costs, set up cost etc.

4 Negative financial impact of
inventory
Carrying

costs: This represents the cost
of maintaining inventories in the plant. It
includes the cost of insurance, security,
warehouse rent, taxes, interest on capital
engaged, spoilage, breakage etc.

Stock-out

costs: This represents the cost
of loss of demand due to shortage in
supplies. This includes cost of...